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EU energy package is first step in a long journey

ANALYSIS | A priority for renewables will still exist via the back door of a curtailment ranking, while tech-neutral and cross-border tenders could cause complications, writes Bernd Radowitz

If you produce more than 1,000 pages of legalese as the European Commission did with its proposals for the various directives and regulations of the EU energy package, you understandably have the urge to present the outcome with dramatic words full of praise.

That must have prompted commission vice president for energy union Maros Sefcovic to call the proposals the “biggest change” to the continent’s energy system “since central power systems were built in Europe.”

European commissioner for climate action and energy Miguel Arias Canete said the package will make Europe stay ahead of the curve in the global race to lead the green energy revolution.

In reality, the proposals follow a typical EU-style logic of slowly going in the right direction, but at the same time trying to reconcile the varying and at time opposing positions of 28 member states. Parts of the package are deliberately blurry to give member states some room for interpretation, other parts may still change in the approval process of the package, so evolution is more likely than revolution.

Some points, however, will be crucial for the renewables sector in the near future:

The approval process

The presentation of the energy package was just the beginning of a lengthy process. A “qualified majority” of EU member states needs to say yes in the European Council. That means at least 55% of member states representing at least 65% of the economic bloc’s population need to approve. The European Parliament also has to give its green light.

That is not easy to achieve, especially as the talks on the energy package (unless they miraculously get completed within five months) will run in parallel to Brexit negotiations, which could occupy much of the EU’s time in the two years after May 2017.

It is also yet unclear whether or how the UK will participate. It could opt out of the energy talks altogether, fully participate due to its interest in linking its vast offshore wind capacity to the electricity system of the rest of Europe, or use the talks as bargaining chip to obtain advantages if Brexit talks get hairy.

Priority for renewables?

Some RE groups are alarmed by the end of priority dispatch, while others such as the influential German renewables federation BEE at least demand improvements during the approval process.

Germany’s powerful energy minister Sigmar Gabriel, however, didn’t even mention the issue in his first reaction – possibly in order not to rock the boat, as what is laid down in the proposals actually isn’t too disastrous at all.

Article 11 of the proposed electricity market regulation defines that the classical priority dispatch – meaning a guarantee for output from renewable generation to feed into electricity grids – will be abolished for most new RE plants. 'More good than bad' as EU unveils energy reform plans

The exception is demonstration projects for innovative technologies or small installations of up to 500kW in the period up to 2025. From 2026 on that threshold is supposed to go down to 250kW.

At the same time, Article 12 of the electricity market regulation makes clear that renewables plants are the last ones to get curtailed in case of excessive power production (in a country or region), which represents a kind of priority dispatch through the back door. Only if overall power output is so high that switching off fossil plants isn’t enough, renewable installations also get curtailed.

This in theory still favours renewable plants, but avoids an excessive construction of power installations that could only feed their electricity into an energy system 'Nirvana'.

If approved in this form, the proposal is very similar to the system already existing in Germany, where after a 100kW threshold all installations need to participate in so-called “direct marketing” in wholesale markets. Producers receive the wholesale price plus a “market premium” for the difference between that price and the agreed support level, so not much is changing for RE installations as long as there is no excess in overall energy production.

This could be complicated for offshore wind, however, as it so far has been more expensive than fossil-based generation, so it could lose out against fossils in the competition in wholesale markets. The commission suggests compensating producers either for costs that arose from curtailment or with a payment of 90% of the revenue they would have achieved if the electricity had been sold.

Technology-neutral and cross-border tenders

The commission wants tenders for power from RE sources to be technology neutral. Article 4 of the renewables directive states support shall be granted in a non-discriminatory and cost-effective way, but doesn’t give detail on what this really means so there is room for interpretation.

Exceptions from this rule – for example for offshore wind – must be justified by member states in a notification process. This in the past has led to periods of uncertainty and horse-trading between member states and the commission.

According to the RE directive proposal (Article 5), tenders or certificate schemes also should be opened for at least 10% of their volume for installations in other member states through 2025, and for at least 15% from 2026 on.

While the idea of cross-border tenders aims at linking national support schemes more closely among each other, in practice this is complicated to carry out as diverging national support schemes and tax regimes distort the outcome, as a recent German-Danish cross border tender for only 5% of the available capacity has shown.

What’s still missing

The EC makes clear that it wants to make support systems more market oriented, but the proposals lack detailed and clear rules on how to achieve that as Germany’s Gabriel (pictured) has lamented. The commission also abstains from asking member states to set binding national RE targets to underpin its target to reach 27% of renewable power across the EU by 2030.

That may be a disappointment for the RE sector, but it is also realistic, as countries like Poland that are determined to protect their domestic coal industry are unlikely to join the club of renewables enthusiasts any time soon (unless market logic forces them to do so at some point).

The origin of the unresolved issues is a very different understanding of a definition of the green or clean energy that Sefcovic and Canete want to dominate Europe’s future energy supply.

For Germany that only refers to renewable energy. For the UK, France and most of Eastern Europe that includes nuclear, and for Poland coal is also part of the equation, as emissions could be lowered through CCS.

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EU energy package is first step in a long journey

ANALYSIS | A priority for renewables will still exist via the back door of a curtailment ranking, while tech-neutral and cross-border tenders could cause complications, writes Bernd Radowitz

If you produce more than 1,000 pages of legalese as the European Commission did with its proposals for the various directives and regulations of the EU energy package, you understandably have the urge to present the outcome with dramatic words full of praise.

That must have prompted commission vice president for energy union Maros Sefcovic to call the proposals the “biggest change” to the continent’s energy system “since central power systems were built in Europe.”

European commissioner for climate action and energy Miguel Arias Canete said the package will make Europe stay ahead of the curve in the global race to lead the green energy revolution.

In reality, the proposals follow a typical EU-style logic of slowly going in the right direction, but at the same time trying to reconcile the varying and at time opposing positions of 28 member states. Parts of the package are deliberately blurry to give member states some room for interpretation, other parts may still change in the approval process of the package, so evolution is more likely than revolution.

Some points, however, will be crucial for the renewables sector in the near future:

The approval process

The presentation of the energy package was just the beginning of a lengthy process. A “qualified majority” of EU member states needs to say yes in the European Council. That means at least 55% of member states representing at least 65% of the economic bloc’s population need to approve. The European Parliament also has to give its green light.

That is not easy to achieve, especially as the talks on the energy package (unless they miraculously get completed within five months) will run in parallel to Brexit negotiations, which could occupy much of the EU’s time in the two years after May 2017.

It is also yet unclear whether or how the UK will participate. It could opt out of the energy talks altogether, fully participate due to its interest in linking its vast offshore wind capacity to the electricity system of the rest of Europe, or use the talks as bargaining chip to obtain advantages if Brexit talks get hairy.

Priority for renewables?

Some RE groups are alarmed by the end of priority dispatch, while others such as the influential German renewables federation BEE at least demand improvements during the approval process.

Germany’s powerful energy minister Sigmar Gabriel, however, didn’t even mention the issue in his first reaction – possibly in order not to rock the boat, as what is laid down in the proposals actually isn’t too disastrous at all.

Article 11 of the proposed electricity market regulation defines that the classical priority dispatch – meaning a guarantee for output from renewable generation to feed into electricity grids – will be abolished for most new RE plants. 'More good than bad' as EU unveils energy reform plans

The exception is demonstration projects for innovative technologies or small installations of up to 500kW in the period up to 2025. From 2026 on that threshold is supposed to go down to 250kW.

At the same time, Article 12 of the electricity market regulation makes clear that renewables plants are the last ones to get curtailed in case of excessive power production (in a country or region), which represents a kind of priority dispatch through the back door. Only if overall power output is so high that switching off fossil plants isn’t enough, renewable installations also get curtailed.

This in theory still favours renewable plants, but avoids an excessive construction of power installations that could only feed their electricity into an energy system 'Nirvana'.

If approved in this form, the proposal is very similar to the system already existing in Germany, where after a 100kW threshold all installations need to participate in so-called “direct marketing” in wholesale markets. Producers receive the wholesale price plus a “market premium” for the difference between that price and the agreed support level, so not much is changing for RE installations as long as there is no excess in overall energy production.

This could be complicated for offshore wind, however, as it so far has been more expensive than fossil-based generation, so it could lose out against fossils in the competition in wholesale markets. The commission suggests compensating producers either for costs that arose from curtailment or with a payment of 90% of the revenue they would have achieved if the electricity had been sold.

Technology-neutral and cross-border tenders

The commission wants tenders for power from RE sources to be technology neutral. Article 4 of the renewables directive states support shall be granted in a non-discriminatory and cost-effective way, but doesn’t give detail on what this really means so there is room for interpretation.

Exceptions from this rule – for example for offshore wind – must be justified by member states in a notification process. This in the past has led to periods of uncertainty and horse-trading between member states and the commission.

According to the RE directive proposal (Article 5), tenders or certificate schemes also should be opened for at least 10% of their volume for installations in other member states through 2025, and for at least 15% from 2026 on.

While the idea of cross-border tenders aims at linking national support schemes more closely among each other, in practice this is complicated to carry out as diverging national support schemes and tax regimes distort the outcome, as a recent German-Danish cross border tender for only 5% of the available capacity has shown.

What’s still missing

The EC makes clear that it wants to make support systems more market oriented, but the proposals lack detailed and clear rules on how to achieve that as Germany’s Gabriel (pictured) has lamented. The commission also abstains from asking member states to set binding national RE targets to underpin its target to reach 27% of renewable power across the EU by 2030.

That may be a disappointment for the RE sector, but it is also realistic, as countries like Poland that are determined to protect their domestic coal industry are unlikely to join the club of renewables enthusiasts any time soon (unless market logic forces them to do so at some point).

The origin of the unresolved issues is a very different understanding of a definition of the green or clean energy that Sefcovic and Canete want to dominate Europe’s future energy supply.

For Germany that only refers to renewable energy. For the UK, France and most of Eastern Europe that includes nuclear, and for Poland coal is also part of the equation, as emissions could be lowered through CCS.